Monday – January 9, 2023

UMBS up 19 bps early. 10y flat.

Stocks extended global gains in risk assets, driven by China’s reopening trade and expectations of slower rate hikes. The dollar weakened and oil rallied. The US December inflation report due Thursday will be front of mind for traders after last week’s jobs data failed to offer a clear picture, with unemployment at its lowest level in decades, while wage gains were weak.

December ISM has now dropped into “contraction” territory, dropping to 49.6 from 56.5. Other than COVID, first time below 50 since 12/09. New orders are at 45.2. One great line from the report “Orders from customers are softening, and some orders are being cancelled. WE have lost employees due to normal attrition and having issues backfilling positions. The supply chain is catching up…..”

Highlights for the week are Powell’s speech on Tuesday, 2 treasury auctions, CPI on Thu, and Sentiment on Friday

Another positive for inflation. Ocean shipping rates are down 80% from their peak in September. It may not have a massive effect of prices for consumers, but it certainly helps

Tuesday – January 10, 2023

UMBS down almost a quarter point early. Mostly from European hours as ECB made comments about the economy needing to slow down. Accelerated on the US open. Mostly gains taking and strategy for Powell speech and CPI on Thu. NFIB index dropped in December to 89.8, below all estimates.

The National Federation of Independent Business overall optimism index dropped to the second-lowest level in nearly a decade. Inflation continues to be the single most important issue.  Despite the overall gloom, there were some positive points in the survey. Inventories are back in balance, which means the supply chain issues of the post-pandemic period are largely in the rear view mirror.

December net job growth was 223,000, the weakest reading since 12/20, and wage growth pressure is clearly waning. But we have a long way to go. The unemployment rate is at a 50-year low, job growth is roughly double a sustainable pace, the labor force participation is essentially flat, job quits increased, and the underemployment rate set a new low. Rates go up by 25bps, maybe 50bps on 2/1/23.

Minneapolis Fed President Neel Kashkari wrote an article on inflation which discusses what the Fed missed in 2021 and lays out what it might do going forward. His point is that when prices rise, both supply and demand should adjust. Rising prices should decrease demand and increase supply. The problem is that supply hasn’t increased.

He likens it to surge pricing on ride sharing apps. When it rains more people would rather ride than walk. Prices rise. However what happens when every available driver is already working? Supply doesn’t increase. And that is where we are now. In economics terms, the supply curve is vertical. Increased demand just increases prices.

“A massive” mortgage credit report price increase is expected in 2023, according to a letter from the National Consumer Reporting Association (NCRA).   So Rocket and UWM are jockeying with initiatives to help brokers shield from the increases.  Fair Isaac Corp. (FICO) has grouped mortgage lenders into three tiers, according to a memo to lenders in November, “with a wholesale price increase of less than 10% for the top tier of approximately 46 lenders, about 200% for approximately six lenders in the middle tier, and more than 400% for all other mortgage lenders in the nation.”

Rocket Pro TPO, a wholesale arm of Rocket Mortgage, will be providing credit reports at no cost for brokers when closing loans through the Detroit lender.    Rocket’s competitor, United Wholesale Mortgage (UWM), recently announced a flat fee charge of $37.35 for brokers ordering credit reports for UWM loans.


Wednesday – January 11, 2023

UMBS 5.5 up 17 bps on the open.  Mostly trades in prediction of CPI coming tomorrow.

Federal Reserve Chair Jerome Powell in remarks Tuesday refrained from commenting on the outlook for monetary policy

before the December consumer price index figures. Signs of cooling could support a move toward slower rate increases, even

as some officials say it’s too early to declare victory over inflation.

Market expects inflation to drop from 7.1% to 6.5%. Core expected to drop from 6% to 5.7%.

Powell also acknowledged that the Fed is getting pressure to “act on climate.” This means he is getting pressure from activists to use the Fed’s supervisory authority to discourage investment in fossil fuels.

Airline stocks recovered from declines in premarket trading after the failure of a key pilot notification system operated by

the Federal Aviation Administration disrupted morning air travel.

Big news yesterday from Wells Fargo, a behemoth in the mortgage lending industry — it will stop all its correspondent lending relationships and look to reduce its massive servicing portfolio. This change in focus has been telegraphed and, as Bloomberg puts it delicately, their mortgage business has “entangled Wells Fargo in regulatory probes and lawsuits.”

According to CoreLogic, October rents were up 8.8% Y-o-Y, down from 10.2% in September and a peak of 13.9% in April. Zillow’s index has November rents up 8.4% Y-o-Y, down from 9.6% in October, and a peak of 17.1% in February. Lastly, Apartment List has December rents up 3.9% Y-o-Y, down from 4.5% in November, and a peak of 17.1% in February. Rents will soon be reducing inflation.

According to Curinos, December 2022 funded mortgage volume decreased 67% YoY and 3% MoM. In the Retail channel, funded volume was down 71% YoY and 3% MoM. Average 30-year conforming retail rates dipped slightly from November but are 319bps higher than the same month last year.

In other news, demand is dropping in a big way for the super expensive homes. Bloomberg had this piece out earlier detailing the $10 million-plus market. The number of signed contracts dropped much more than expected in the second half of 2022. The article notes that sales figures are strong given the elevated prices, but contract activity is really dropping off. It was also noted that “super-prime is usually one of the last tiers to collapse but the first to recover” as the big wallet buyers will see opportunity in a soft market.

Our focus this week has been on the notion of consolidation after last week’s strong gains and ahead of this week’s CPI (the all-important Consumer Price Index due out at 8:30am ET on Thursday, Jan 11). Friendly comments from Fed’s Collins (favors 25bp hike) helped modestly in the afternoon, as did a well-received 10yr Treasury auction.  But the potential movement following the CPI data is in an entirely different league.  It has been the most important monthly economic report for almost a full year now

Thursday – January 12, 2023

MBS up 8 bps, improving .10 while writing this.  The 10y down 7 early.

Bonds were lower in the overnight session.   Traders were clearly expecting a “whisper number” that was lower than the median forecast.  Simply by coming in as expected, CPI managed to disappoint the market (this also ups the odds for a bounce back after this initial leg of selling).

      • monthly headline CPI=  -0.1 vs 0.0 f’cast, 0.1 prev
      • monthly core CPI=  0.3 vs 0.3 f’cast, 0.3 prev

The news this morning is the CPI data release. It first appeared that someone had the data early with the market rallying ahead of the release, but then the data came in right on the screws. Pretty much every reading matched the Bloomberg survey estimate .  There has been some healthy chatter this morning in Chris Maloney’s anonymous Bloomberg chat following the release. The market is pretty messed up and there is a lot of uncertainty about how the Fed will handle rate raises going forward.

If you take the last 2 readings and extrapolate it out for 12 mos – the run rate would be 1.6% on the headline and core would be 3%. Though that would still be increasing prices along the way and establishing very high levels. Without Deflation (bad) they will just stay HIGH.

Energy Fell 4.5% MoM. Gas fell 9% and is down 15% YoY. Food climbed .3% MoM and 10.4% YoY.

Yesterday’s 10y auction was pretty good.

30yr bond auction

      • 3.585% vs 3.610% f’cast
      • Bid to cover 2.45x vs 2.36x avg

Bonds were already rallying over the past 3 hours, but the auction results are kicking things into just slightly higher gear.

You won’t see too many days with a 10+ bp rally in 10yr yields in response to an economic report coming out right in line with expectations.  But that’s more or less what happened today.

Wall Street looked past its initial disappointment with a just in-line consumer price index to focus on the idea that an inflation peak is possibly in the rear view.  That perception is visible in the swap market, which is showing less than 50 basis points of tightening priced in for the next two Fed gatherings — a small chance of no move at all in March.  None of that means, of course, the Fed will soon declare victory over inflation.


Friday – January 13, 2023

Bonds began the overnight session just slightly weaker and then held perfectly flat in Asia.

UMBS down 14 bps on the open as the market continues to digest and debate the future, in light of CPI yesterday. With investors and the Fed in a face-off over what future rate decisions are going to look like, volatility will likely remain elevated until such a time as one of them blinks. This uncertainty should help keep banks’ mortgage demand on the sidelines through the beginning of summer.

Dec. import prices rose 0.4% m/m after falling 0.7% prior month, according to the BLS. Estimate of -.9% Reprice risk on the day is low, should be a pretty quiet day heading into a long weekend. Markets are closed on Monday for Martin Luther King Jr. Day, We aren’t likely to see rates drop too much further unless we get a dovish message from the Fed at the end of the month, and that’s not looking likely as of now. Fed members are still towing the company line that the fed rate needs to be above 5% and not come down in 2023.

Consumer sentiment improved in January, according to the University of Michigan Consumer Sentiment Survey. Inflationary expectations fell from 4.4% to 4% which is good news for those who want the Fed to take its foot off the brake. Consumer sentiment is still awful overall, stuck at the levels we saw during the Great Recession. Apartment rental rates rose 5% YOY according to data from Redfin. They were down 1.4% MOM and off 3.6% from the peak set in August. Some of this is seasonality, however the massive growth we saw in 2021 is over, and rents will generally lag home prices by 21 months or so.

The inversion between the 10 yr note and 3 yr Treasury is almost 120 bps. Strong correlation to recession.

It’s nice to be wanted, and agency mortgage bonds just spent the QE4 Era having their dance card constantly filled by not only a voracious central bank but by actual U.S. banks in general, too. However, the Federal Reserve has stepped away and is now allowing $11 billion or so each month of mortgages to slip unwanted right off its balance sheet, while large domestic banks, which increased their agency mortgage holdings by 36.1% from March 2020 until 2021 year end, have seen their holdings since that time drop 7.2%. Still, large domestic banks’ aggregate holdings come to $2.1 trillion, which is nothing to sneeze at, so the question becomes just how robust might bank demand be in 2023? Over the near term at least the answer is likely, “not very.”

Wells Fargo, which reported that it’s fourth-quarter earnings were half of what it earned in the same quarter of last year.

Elsewhere: There was better earnings news from the nation’s two largest banks, JPMorgan Chase and Bank of America, both of which beat analysts’ expectations

Common Sources and influences






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